They pointed out it's a bubble, a tulip mania, a pure speculation, the actual value of the Bitcoins is zero – and independent of the intellectual worth of the blockchain ideas, and it's not a currency because you can't buy anything for it (especially tomorrow or later for prices you could rely upon) and it doesn't store value because of the volatility. The Motley Fool explained why it's laughable that the Bitcoin could become a safe haven like gold. Not bad for a fool – although his being Motley makes him a very smart fool, indeed, almost like the Einsteinian Moron.

Sane people have realized the facts like Dimon for a long time. What's changing most abruptly are actual steps that a government is taking these days. And I don't mean Ukraine and Indonesia that won't allow the Bitcoin payments, as we learned today (governments have lots of reasons to ban it). I mean the government of China. China banned the ICOs – the jokingly named would-be counterpart of IPOs where real money is collected for new cryptocurrencies. It is in the process of banning cryptocurrency exchanges.

But it seems very likely that it will strip the private Chinese Bitcoin miners from their freedom, too. And things get much more interesting here for certain numerical reasons.

Most Bitcoin cultists say "let them go" or "it's great if the Bitcoin divorces the evil governments such as the government of China". But these cultists haven't understood the basic facts. And the most basic fact about the Bitcoin is that the owner of a majority of the CPU/GPU mining power controls all of the Bitcoin, its rules, and the legitimacy of transactions.

I hope that the readers interested in this business mostly know how it works. The power over the money and the rules has to belong to somebody and in the case of the Bitcoin, it just belongs to a majority of the distributed miners. They can pick the longest chain and decide whether it's legitimate.

If you have doubts about this basic concept, let me copy both paragraphs from Satoshi Nakamoto's bitcoin.pdf paper that include the verb "vote":

The proof-of-work also solves the problem of determining representation in majority decision making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. The majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes. We will show later that the probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added.

...

We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double-spending. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.

Well, if a coalition controls over 50% of the mining power, it determines the rules. It's as simple as that. You think that the power should belong to a majority of the holders of the Bitcoins? Loudest screaming teenage trolls on Reddit? Well, you're just wrong. The mechanism had to be built in some way and it was built so that the power comes with CPU/GPU capacity used for mining.

This majority voting has been tried e.g. during the discussions to fork the Bitcoin and introduce new changes such as the SegWit, a segregated witness. Let me mention that in early August, old Bitcoin was forked to new Bitcoin and Bitcoin Cash. Bitcoin kept blocks at most 1 MB large while Bitcoin Cash increased the block size to 8 MB. On top of that, the Bitcoin agreed to introduce the SegWit which it did in the late August. That was a part of an agreement which will be followed by a doubling – not octupling – of the block size. The Bitcoin Cash expects no additional changes and should keep on working without the Segwit. Meanwhile, miners no longer agree with a consensus to double the block size for the Bitcoin which will almost certainly lead to another fork of the Bitcoin to two currencies in November.

People, developers etc. had some opinions but the final decision had to be made and will again be made by the miners. Yes, the miners depend on the developers but they have the "direct political" power; the developers are basically their and all Bitcoin holders' employees. Their disagreement is analogous to a workers' strike and it may be dealt with by hiring strikebreakers, too.

Is there some different "majority of the miners" that could make such decisions? The miners look like numerous private entities that are unrelated to each other so they have no reason to create a "rogue clique" that would suddenly change the rules in some dramatic way. But if this is how the miners look to you, well, then you haven't looked too carefully at all. ;-)

A basic number is that some 2/3 of the mining power is located on the territory of mainland China. And you know, while China's economy has become a heavily capitalist, free-business, free-trade economy, sometimes trumping Western countries in the freedom of doing business, there's still an elephant in the room that you shouldn't overlook. When it comes to the actual political power, China is a non-democratic country that is centrally controlled by folks connected to the Chinese Communist Party. And that matters.

It really means that all the private ownership in China is conditional and heavily restricted by something that transcends it. In particular, China is taking control over the cryptocurrency business in that country. The government can do many things with it. It can really do anything. And it can do some relatively interesting things, too.

It's rather likely that the people who were running the exchanges and/or the mining farms in China will be punished. Well, those who won't be punished either by the death penalty or by life in prison will have to be very thankful. (The cryptocurrency exchange bosses have already been given a travel ban.) And the government may just liquidate this "evil portion of the grey economy" where people got very rich for no good reasons. The government in China may choose to act as a bull in china [pun intended]. Such a bull in china would act as a Bitcoin bear, not bull, however [another pun intended, I am on a roll]. The drop of the price from the record high $5,000 to $3,600 today could have been caused mainly by China – but China may cause much more brutal collapses in coming weeks. The rest of the Bitcoin holders may recover and switch to the thinking that "they are paying with a future currency that works outside China". And that divorce will be the end of the story.

But China can do something else than this destruction, something that is more creative. It may just nationalize the companies, especially the mining farms which are interesting because they come with the power. It's possible that this process is already underway. From this perspective, you should be able to conclude that

65% of the Bitcoin mining capacity is controlled by the government of China.

Well, that makes a difference. These miners – that will be centrally controlled – may change the rules of the Bitcoin. Again, any such change could be just "destruction", resembling what Daesh did to various old structures in the Middle East. However, the change of the rules could be much more creative and "potentially beneficial" for China.

Ending the scarcity of the Bitcoin

One of the clichés constantly repeated by the Bitcoin cultists is that the Bitcoins are scarce. There are currently 16.6 million Bitcoins and the number is slowly converging towards 21 million – which will be reached, within 1 Bitcoin, in the year 2140. They are thinking into the far future, indeed, while they're not too interested in the rather possible collapse of the currency next month. ;-)

Is it an advantage for the number of Bitcoins to be bounded? Well, it's not. The growing money supply is really needed in a healthy growing economy. Anything else would mean big deflation and therefore hoarding of the money – and the money's circulation would stop which is bad (either the economy is slowed by the insufficient money supply; or people have to switch to another [de facto or de iure] currency; or the effective money supply increases, anyway, because banks or people issue new banknotes softly pegged to the old, limited ones – just like when the gold standard was being abandoned). So the limited supply of the Bitcoins is really a fatal flaw that is a source of the inability of the Bitcoin to become a usable currency.

But people are "happy" to be savers holding Bitcoins because their share of the Bitcoin pie cannot decrease. However, this reasoning is also irrational because what they should care about isn't the percentage of the pie they hold but the total value of the piece of that pie. Their piece of the Bitcoin pie is worth\[

\] The cultists – but also some Ron-Paul-style gold fanatics – are only interested in the first factor, the percentage of the pie they hold. But that percentage changes by a few percent a year in the Bitcoin or fiat money cases (new fiat money is being printed and new Bitcoins are mined – the relative increases weren't too different in recent years) while most of the changes take place in the second factor, the value of the whole Bitcoin pie. The total capitalization of the Bitcoin pie quadrupled in 2017.

The value of the Bitcoin pie is what changes so dramatically and what really matters for a Bitcoin investor. It basically started at zero around 2009 and the question is what it should be now, in 2020, and so on. There's no calculation of a finite value because the Bitcoin is intrinsically worthless. The price has to be scale-invariant, obeying \(x=4x\), and \(x=0\) is the only finite solution you can think of. If the quadrupling of the price didn't need any events, it's because the actual price is equal to its quadruple which means it's zero.

The Bitcoin cultists cleverly find another, more psychologically attractive, solution of the equation \(x=4x\), namely \(x=\infty\). They don't care about the sign too much, the real solution is really the "point at infinity" in the complex plane (and those Bitcoin businessmen in China who will be executed could claim that the value is minus infinite). So in practice, the Bitcoin cultists say that the Bitcoin's price growth must be unlimited. To say the least, the total value of the Bitcoin pie has to be equal to all the money in the world.

Here a miracle occurs. Just imagine how utterly stupid this assertion is. You take something that had no value so far, like an old stinking pie, divide it to 21 million pieces, scream that it's wonderful that the number of pieces of finite, and then deduce that the stinking pie is going to be as valuable as all the money in the world. Have you lost your mind? Just because the number of pieces is finite doesn't mean that the pie is valuable, let alone comparable to all the mankind's wealth. If you own a pie, you might surely want this statement to be true, but it's a wishful thinking. From a rational perspective, it's ludicrous. Satoshi holds 10% of the Bitcoins and he may want to own 10% of the mankind's wealth instead. But will the other people voluntarily give him 10% of everything in the world in the next 5 years? ;-) The physically correct solution of the equation \(x=4x\) that you should pick is still \(x=0\). The pie is worthless, the current price is already an insane overestimate of zero, and prices of the Bitcoin that are 100 times higher are 100 times more insane.

The scarcity of the Bitcoin is insanely overhyped – it shouldn't really be hyped at all. But on top of that, it isn't even true. The statement that

the number of Bitcoins won't ever exceed 21 million

is only valid under some conditions, namely the condition that a majority of the Bitcoin miners keep on agreeing that things should stay in this way. And that's a very, very big IF, indeed. The limitation above is just a damn convention created by humans that may be changed by humans, too. And it may change in days or weeks from now.

So what I would advise to the Chinese government if I were an adviser? I would tell them to announce that they control the majority of the mining power, so according to the theoretical Satoshi Nakamoto's rules as well as the practical rules as they work in the Bitcoin network today, they're the official authority behind the Bitcoin and will dictate the rules. At this moment, there are 16.6 million Bitcoins and each of them is worth some 24,000 Chinese yuans.

Lots of people got rich for no good reason but the blockchain idea and the famous name of the Bitcoin could be helpful for some things.

As a Chinese regulator, I would "mint" new Bitcoins and drive the market price of the Bitcoin to some lower sensible value, e.g. 1,000 yuans (some $150). I would promise to back the Bitcoins by yuans – guarantee that everyone can be given physical yuan banknotes for his Bitcoins, at the rate of 1,000 yuans per Bitcoin.

Right afterwards, if the price stayed at 24,000 – some 24 times above the current price – I would be changing the Bitcoin supply to gradually (or abruptly?) drive the market price of the Bitcoin towards 1,000 yuans. The simplest and least intrusive way to drive the price over there is to increase the total supply of the Bitcoins. So I would create new Bitcoins and automatically give them to the account of the Chinese government – some exceptional transactions.

From the current 16.6 million, the supply of the Bitcoins could be increased towards 50 million or some nice number. Two-thirds of the Bitcoins would be owned by the Chinese government, the price would be guaranteed to be above CNY 1,000, and the actual price would slide from the current CNY 24,000 towards CNY 1,000. Or the numbers could be adjusted in any way, whatever looks practical to the regulators.

A question is whether the Bitcoin, even if it had some stable enough value, would be useful for anything. Even such a regulated Bitcoin would be a tool to make some financial transactions less visible. Does China actually want it? Maybe it does. Maybe the Chinese government wants to make similarly invisible transactions itself.

At any rate, this particular situation shows that the frantic belief of the Bitcoin cultists that the rules of the Bitcoin (such as the maximum number) can never change are really pure speculations that aren't supported by anything. The price of the Bitcoin is only given by the people's will to make them cost something. But the people controlling the mining pool may decide it's time to send the Bitcoin's value back towards zero, too.

If you want to remain a Bitcoin holder, you should learn Chinese and read the books by Mao. Tony, I really advise you to sell your Bitcoins. The possibility that $5,000 was an all-time peak seems extremely plausible to me and the possible decrease just by 30% is incredibly modest.

Because I just found a $60 billion pie that the owner, the Chinese government, could have lost or overlooked, I expect the 10% finder's reward, i.e. $6 billion. Thanks in advance but please don't pay it in the Bitcoins. ;-)